Monthly Archives: September 2017

The POWER of HECM62; 10 steps on how it works; This is the winner’s circle

The power of 62 is an age, like 21, or 65; For the HECM, it means you are “of age” — eligible.

Mark it on the calendar. Make a star for 60, because that means you are only 2 years away from launching a HECM use of home equity to survive retirement in one piece. It means you might qualify for a big bonus. You can get a HECM, and there are bunches of benefits on this webpage about HECMs. Walk through these expected steps to be familiar.

If you are already 62, have at least 50% home equity, it’s time to get a move on. You have the makin’s of a winner. Use what you have to move up now. Loser’s quit. They get discouraged. They don’t think positive anymore. But that role doesn’t fit you, does it?

Think how much more money you’ll have if you don’t pay all that interest on your mortgage — get rid of the mortgage. Take that money you saved and do something you’ve been wanting to do for a long time. That’s what winners do, they plot with their opportunities and win because there’s still room in the winner’s circle. Now, they are thinking ahead — and they are alive with new ideas — and they won’t be planning to live in the rest home. They’ll still be looking ahead. That’s what life is, but unfortunately, a lot of us are lazy and depressed without much hope for the future. We say “no” because we don’t have courage to say “yes” when we want to or have the power to believe in our dreams.

  1. Buy a house, make payments, watch equity grow.
  2. Plan retirement utilizing (about 50%-100%) home equity and other sources you have created.
  3. When you are 62, pay off your forward mortgage with a HECM, establish your HECM line of credit (You won’t need a HELOC which requires payments).
  4. Determine how much of your HECM will come as a lump sum. Use the lump sum to pay off as many bills as you can to eliminate debt and increase cashflow.
  5. Cashflow increases as payments are phased out.
  6. Use your line of credit to cover emergencies, long term care, watch it grow without payments.
  7. Thru appreciation, your home value will continue to grow over time.
  8. Line of credit will grow — like the real growth savings account you never had and without payments so long as taxes and homeowner’s are paid current.
  9. Laugh your way to the bank, pass “go” and collect combined wealth.
  10. Plan your legacy with an inheritance for your family. It could exceed all your imagination.

Talk to your loan officer about the POWER of HECM — see “information” ( in navigation bar, ask questions, get government mandated counseling, get the wheels turning.

Think win win.

HECM Reverse Mortgages: Now or Last Resort?

Pfeiffer, Schaal & Salter

By Tom Davison on November 15, 2015

(This is an unchanged repost of an earlier contribution)

Does it pay to get a reverse mortgage early in retirement, or is it better to wait until it’s absolutely required – a “last resort”? New research shows early is better. In the most challenging case nearly twice as many homeowners who got a reverse mortgage early still had money at age 92  than those who waited until their investments were gone to use their home equity.

The authors said: “Early establishment of the HECM line of credit in the current low interest rate environment is shown to consistently provide higher 30-year survival rates than those shown for the last resort strategies.”  The May 2014 study by Pfeiffer, Schaal and Salter was published in the Journal of Financial Planning. It is another article from the team (Salter, Pfeiffer and Evensky) who investigated the “Standby Reverse Mortgage”.  Monte Carlo simulations of many lifetimes analyzed investment portfolio withdrawal rates of 4%, 5% or 6% starting at age 62 and running for 30 years. To help improve retirement success a Home Equity Conversion Mortgage (HECM) reverse mortgage line of credit (LOC) was obtained one of two times: either at age 62 or later when the portfolio was completely spent. In either case the LOC was tapped only after exhausting the investment portfolio.

The authors designed the study thoughtfully and describe various conditions affecting LOC. The results are measured by the client’s sustainable withdrawal rates and net worth after 10, 20, and 30 years. To develop an intuitive feel for the results the graphs below show the study’s LOCs. The long brown line show the LOC starting at age 62 and three conditions when established late (short green lines). In the study the “late” LOC is  in each simulated lifetime is set up at the age when the portfolio runs out – the graphs show age 82 as only one example. The study looks at low, medium and high interest rates in effect when the late LOC is set up. Interest rates and LOC sizes are inversely related: when interest rates are high the homeowner gets a smaller LOC, and conversely a larger LOC when interest rates are low. HECM regulations are designed to balance risks and benefits among borrowers, lenders and the FHA insurance program by adjusting the actuarial chances that the HECM loan value will end up exceeding the value of the home. Once a line of credit is in place, higher interest rates lead to higher loan balances, so those starting balances are reduced. Among the three green “late” lines, the bottom dark green line is for the highest interest rate, so it has the lowest starting point and fastest growth. The tradeoff between starting loan size and the loan’s growth rate leads to the late LOC lines converging after about 10 years. (Note: this discussion blurs the distinction between the two different interest rates used to determine initial loan size and to determine the LOC growth once it is set up).

The tan columns show the house appreciating at 3% or 5% a year. The early (brown) line of credit is naturally the same in the two graphs as the home value at the start and grwoth is the same regardless of future home appreciation. The second graph shows the house appreciating faster so the “late” green lines of credit start at higher values, so are closer in value to the early LOC. The top graph’s “later” credit lines start around $200,000 while the bottom graph’s start around $300,000 due to the higher home value at age 82. You can see the advantage of getting the LOC early is smaller when the house appreciates faster.

What does “later” mean? “Later” means what it does to you. It’s your retirement and you can adjust quickly or put it off. In the end, you will prosper with a HECM if it is still available at whatever level it is when you “later” it.

See “Information” on home page for contact information.

The graphs show the people with the early LOC (the long brown line) had the most reverse mortgage resources later in life to fund spending, and the simulation results confirm that. For example, the “early” people who exhausted their portfolio at age 82 had close to $600,000  in their LOC.

Six groups got their LOCs late. Out of those, the highest green line starting at age 82, and therefore closest to the “early” brown line, were those in the bottom graph where the house appreciated the most, and in the low interest rate environment – the highest start of the three green lines. They got close to $400,000 to help their spending. The worst group to have been in were the people in the top graph where the house appreciated the least, got the LOC late, and found themselves in a high interest rate environment – the bottom darker green line. They got under $200,000 to help their spending.

In their conclusions the authors suggest considering postponing setting up the HECM line of credit when there is good reason to believe that home occupancy after loan origination is likely to be less than 15 years. This recommendation is well founded, but should be understood to be based only on this paper’s specific use of the LOC. A variety of other uses of the LOC would have shorter minimum expected stays. (And of course many applications have immediate use of HECM funds!)

The study did not evaluate other homeowner uses of the LOC, such as unplanned health care expenditures. At the lower 4% and 5% withdrawal rates the early LOC would often have untapped capacity, and would have been completely untouched in a number of lifetimes. A similar observation was median wealth at age 92 did not reflect any untapped line of credit above the home’s value. The authors are to be commended for judiciously conservative assumptions and circumspection in their recommendations. Examples of conservative assumptions were the LOC”s cost included a $35 monthly fee which many lenders don’t charge, using the maximum allowable loan origination fee, and setting closing costs near the top of the expected range.

Returning to the author’s focus on using the LOC once the portfolio has been exhausted, the early line of credit’s advantages are highest with:

longer stays in the house, thus more time for the LOC to grow

higher short-term interest rates after the early line is set up, creating faster growth of the line of credit’s borrowing limit

higher long-term interest rates later in life, resulting in lines of credit set up later being smaller (dark green lines in the graph)

slower home appreciation

Other reasons an early line of credit may be advantageous in aiding spending from investment portfolios include:

ability to draw from the line of credit rather than the portfolio in times of significant market downturns

if long-term investment returns are lower, due either to the client’s very conservative asset allocation or lower market returns

when the client has higher tax rates, as the line of credit draws are tax-free, while investment portfolio withdrawals are generally tax-burdened

locking in the current HECM program rules, as there has been a trend to increasing restrictions

creating a larger contingency fund, potentially exceeding the future value of the house

For a much more complete discussion of the study with thoughtful insights please see the original paper!


Pfeiffer, Shaun, C. Angus Schaal, and John Salter. 2014. “HECM Reverse Mortgages: Now or Last Resort?” Journal of Financial Planning 27 (5) 44–51.


Reverse mortgages provide access to cash without monthly pmts.

Reverse Mortgages: Many Users, Many Uses


Reverse mortgages provide access to cash. Cash is the most flexible financial resource of all. In turn, access to cash makes a reverse mortgage a very flexible resource. Many homeowners could qualify for an FHA Home Equity Conversion Mortgage (HECM).

Reverse mortgages provide access to cash without monthly pmts.

Steven Sass, a research economist at the Center for Retirement Research at Boston College,  in his recent research brief “Is Home Equity an Underutilized Retirement Asset?” observed that while “retirement planning generally focuses on the use of financial assets,” he finds that “home equity is the largest store of savings for most households entering retirement.” And indeed, “for many households, particularly those with less wealth, home equity is larger than financial assets.” He analyzed home equity and financial wealth across households ages 65-69 for 2012 and expresses it in thousands of 2015 dollars.

For financial planning purposes, I overlay the concept of how adequately funded a homeowner is for retirement. “Fundedness” reflects how well a family’s financial resources match their retirement needs and desires. Many in the top wealth quintile would be Well Funded, as would part of the third and fourth wealth quintiles. Constrained and Underfunded describe a broader range of households.

While the distribution of wealth is not surprising, it provides context for appreciating the range of homeowner’s needs and how their home equity may contribute by using a reverse mortgage.

Reverse mortgages provide access to cash without monthly pmts.

The value reverse mortgages could bring to the aging US population starts with the breadth of users and uses. The value and breadth also challenge homeowners, financial professionals, and the reverse mortgage industry to find good matches between an individual homeowner’s situation and their highest and best use of a reverse mortgage.

HOUSING WEALTH has come forward to center stage thinking

RISK MANAGEMENT survive and thrive in retirement requires new thinking and a clear understanding of all the options.

Over the past 12 months, the Department of Labor ruling has made it abundantly clear that all advisors have a responsibility to do what is in the best interest of their clients. Part of that responsibility means staying informed about current thoughts, trends and legitimate tools that could have a positive or negative effect upon their ability to help their clients’ meet their overall goals.

Housing wealth has become one such tool. No longer can it be relegated to the back room or basement strategies. It has come forward to center stage thinking. Retirement Planning Has Changed Financial planning in the generic sense is a recent phenomenon. Retirement, in its current context, is fairly new.

For centuries, most people worked for as One Simple Strategy Every Advisor Should Know Don Graves, RICP At first glance the article title seems to suggest that a home equity conversion mortgage (HECM), also known as a reverse mortgage can be used to hedge or mitigate some of the more common risks of retirement.

But I realize that for some advisors, the very notion of reverse mortgages being implemented in financial planning is absurd. Suppose the oft-maligned and seldom suggested, red-headed stepsister of financial planning had more to her than you imagined? Could her beauty and brilliance be veiled by mythology and misperception?

What if the lowly 30-year-old reverse mortgage could help your clients preserve more assets, improve cash flow, ensure liquidity and mitigate risk? What if it allowed you to differentiate your practice, impact more clients, and make more money, would you want to take a closer look?

In a moment, you will discover two couples that did everything the exact same way, but had two completely different outcomes primarily due to their advisors’ beliefs about reverse mortgages. Historically, the more affluent retiree and their advisor have either simply dismissed the reverse mortgage or relegated it to use as a last resort. However, much has changed in the last few years.

Recent research suggests that the appropriate and strategic use of the newly restructured reverse mortgage may be helpful in positively impacting retirement outcomes. For many in the boomer generation, to Can Reverse Mortgages Hedge the Most Common Retirement Income Risks?

  • Same Savings at Retirement • Same Withdrawal Strategy • Same Amount on Same Days • Same Investments COUPLE A Ran out of savings in 23 years COUPLE B Had $1.1 million in savings 30 yrs. later long and hard as they could and then died soon thereafter.

The contemporary notion that you stop working with enough saved money to last 20, 30, 40 years is a product of modernity. For the last 75 years (at least since the advent of Social Security), people were expected to live on their personal savings, a company pension, and Social Security during retirement.

But the erosion of private pensions, the dismal lack of personal savings, and the strain on the current Social Security system has created an outlook for today’s retirees that will require financial ingenuity and new tools in order for them to protect and preserve their nest eggs. Born just after midnight, on January 1, 1946, Kathleen Casey-Kirschling, will forever be known as America’s first baby boomer.

Nearly 70 million more after her would be born up until 1964. No other group has so thoroughly changed the landscape of America quite like the boomers. Now nearly 10,000 boomers a day are turning 62.

In the middle of this last year, Kathleen was the first of the boomers to take her required minimum distributions. The boomers will leave a legacy both positive and negative, the historians opine. At the onset of retirement, there are three issues they must confront.

They will live longer than previous generations, have not saved enough to sustain their longer life span, and are more in debt than any other known previous generation. It is estimated that nearly 68 percent of new retirees will be carrying some sort of mortgage servicing debt into their retirement. This does not take into account credit cards, car payments, or student loans for which they served as a cosigner.

Surprisingly, there is one thing that boomers have in their favor–87 percent of them own a home. As a matter of fact, the average, married, retiree today will have $92,000 in savings but $192,000 in home equity. This “housing wealth” as my friend, Dr. Sandy Timmerman, founder of the Met Life Mature Market Institute, says, “will become the boomers’ salvation!”

Now if all of this was not bad enough, the new retirement paradigm is filled with unforeseen dangers. In times past, retirement was likened to ascending to the summit of Mt. Everest. Clients braved the elements and proceeded with discipline until finally they set foot atop the grand mountain of accumulated assets.

There they pulled out their flag and staked it in the ground, proclaiming “mission accomplished,” thinking the danger had passed and the hard part was over.

Unfortunately, that is not the true danger in climbing Mt. Everest. Nearly two-thirds of all mountain climber deaths transpire on the descent. Similarly, the most dangerous part of the retirement mountain occurs after the flag is planted when our clients begin to live on what they accumulated.

This is the true threat in retirement and the opportune place where skilled financial Sherpas showcase their knowledge. Good retirement income planning focuses on the dangers of descending the mountain and using all available tools to help the client arrive safely back at base camp.

Risks in Retirement

As baby boomers move into retirement there are significant apprehensions and a slew of frightening questions. Will they have enough money to last through their golden years? Will they be able to enjoy the lifestyle they imagined? Will unexpected expenses throw off their retirement plan? Could a market crash decimate their carefully built nest egg and leave nothing for the next generation?

These concerns are considered to be the 4Ls:

  • Longevity: Will I have enough to meet my basic needs?
  • Lifestyle: Will I have enough to get a steak instead of a hamburger?
  • Liquidity: Will I have access to tax-advantaged money for possible spending shocks?
  • Legacy: Will I leave a good financial memory? There are more than just those four concerns.

There are genuine and perilous risks underlying each one of them. The Retirement Income Certified Professional RICP® course that I teach at the American College lists and clarifies the 18 risks in retirement income: • Longevity risk • Inflation risk • Excessive withdrawal risk • Health expense risk • Long-term care risk • Fragility risk • Financial elder abuse risk • Market risk • Interest-rate risk • Liquidity risk • Sequence-of-return risks • Forced retirement risk • Re-employment risk • Employer insolvency risk • Loss of spouse risk • Unexpected financial responsibility risk • Timing risk • Public policy risk You can download an expanded summary of these risks at

Four Risks in Particular

Clearly identifying and managing risks in retirement income is on every advisor’s mind. Let’s look at four risks in particular and see if the reverse mortgage can add value. Longevity Risk In 1935, when Social Security was first established, the average life expectancy was only about 61 years.

Today, it has risen to in excess of 78 years and is growing steadily. Living to age 100 could soon be the norm. The necessary financial preparedness for such a length is daunting. Running out of savings in retirement is the number one concern of most retirees because of all the unknowns that exist.

In consideration of all the risks that exist in retirement, longevity is the most significant because it is a risk multiplier that only serves to magnify the others. Inflation Risk The inevitable increase in the cost of goods and services will slowly erode your client’s purchasing power.

With as little as a 3 percent a year inflation rate, your clients would see a 50 percent reduction of purchasing power over 20 years. Excessive Withdrawal Risk Life is short and capricious. Retirement for most will be long, expensive and yes, unpredictable.

Clients will face emergencies, unexpected expenses or simply want to experience some extra enjoyment. They may be forced to choose to cannibalize and/or annuitize assets prematurely.

Consequently putting increased pressure of their ability to have those funds when needed most—later in retirement. Sequence of Returns/Market Risk Sequence risk involves the actual order in which investment returns occur. When you regularly invest in a retirement plan the movement of the market up or down will not have nearly as much significance as it will when you begin to withdraw funds.

Unfortunately, when you withdraw money from your portfolio during retirement, the volatility of markets can inflict substantial damage. If you take a set amount in distributions each month, you end up selling more shares when the market is Risk Management

LONGEVITY Enough savings to meet my basic needs for life

LIFESTYLE Enough to enjoy retirement on my terms

LIQUIDITY Access to tax advantaged money when I need it

LEGACY How will I and my money be remembered low—locking in your losses rather than giving the market a chance to recover.

Let’s take a look now at how a reverse mortgage can help. Reverse Mortgages Have Come of Age If you ever wanted to ruin a good barbeque, family reunion, office party, or Thanksgiving dinner, just let someone mention that they are thinking about getting a reverse mortgage and watch what happens.

Once considered the “Rodney Dangerfield of financial products,” this lowly and maligned resource is now coming center stage. For nearly two decades, I have shared the simple truth that a reverse mortgage “is just a mortgage!” That’s it. When we boil it down to its essence, that’s all it is.

Quiz: Which Client got a Reverse Mortgage? Two clients go to their respective advisors and ask about the wisdom of obtaining a home equity loan or home equity line of credit (HeLOC) so they don’t have to use savings for emergencies, expenses, or simple things they want to enjoy. The advisor responds that setting up a HeLOC is very common and wise. So each of the retirees finds a lender, produces qualifying documents and obtains a $100,000 line of credit. They both go out and promptly spend all of the money and the following month, they both begin to make the same monthly payment at the same interest rate.

Finally on the same day, with their final payment, they both pay off the loan balance and the accounts are closed. Does anything seem unrecognizable or spooky so far?

Here’s the truth: One of those clients got a reverse mortgage and the other one did not. Can you tell the difference? A reverse mortgage is a federally insured loan for people aged 62 or better that allows them to convert a portion of their home’s value into tax-free money. They are not required to make a monthly mortgage payment or be removed from the title to their home. They must continue to pay all property related charges such as taxes and insurance. The amount of money they receive is based on their age, the home’s value (up to the lending limit of $636,150), and the current interest rates.

Today a 65-year-old could receive around 50 percent of the home’s value. For more information on rates, go to

What’s So Special about the Line of Credit

The proceeds of a reverse mortgage can be received in a lump sum, monthly payments, or as a line of credit. The difference with the reverse mortgage line of credit (ReLOC) versus a traditional HeLOC is that the reverse mortgage has a built in contractually guaranteed growth factor. (Currently, the rate is around 6 percent.) This means the unused portion of the ReLOC will continue to grow year by year. As long as the borrower lives and maintains the home and keeps their taxes and homeowner’s insurance in force, the line of credit cannot be frozen cancelled or reduced. This is regardless of the home’s future value, the income, assets or credit of the borrower. Don’t miss that line. The ReLOC has a: • Built in contractually guaranteed minimum growth factor • Allows the unused portion of the line to grow • Regardless of the home’s future value That is the secret, the one mechanism that changes it all, the eighth financial wonder of the world, the Swiss Army knife of financial planning, and the one truth that encouraged FINRA to change their position that reverse mortgages should be used only as a “last resort.”

The table on page 5 shows a $200,000 home creating a $100,316 line of credit that grows to $608,000 over a 30-year period; $204,000 grows to $1.2 million; and $311,000 grows to nearly $1.9 million. How the HECM Line of Credit Can Mitigate Retirement Income Risks Longevity Risk and Inflation Risk To guard against inflation and protect from longevity risks, advisors have traditionally moved clients into more aggressive allocations measures or inflation-protected securities and annuities etc. Imagine adding a ReLOC, early in retirement with a strategy to simply “set it and forget it” allowing it to grow for future use down the road.

Today’s ReLOC is growing at around 6 percent (with a minimum guarantee growth factor of 4 percent). With inflation at 2 to 3 percent today and perhaps averaging 4 percent over time, the HECM line of credit not only gives tremendous growth potential but is also nearly 3 percent greater than today’s inflation rate. This is a powerful hedge against both longevity risk and inflation risk. The chart on page 6 developed by my teaching colleague, Dr. Wade Pfau, shows a $250,000 home growing at 3 percent (top line) and a $125,000 ReLOC growing at 6 percent (middle line) with the lower line showing the impact of setting up the line of credit later in retirement. This data highlights the advantages of establishing the ReLOC as early in retirement as possible.

As noted recently by Dr. Pfau, “There is great value for clients in opening a reverse mortgage line of credit at the earliest possible age, particularly in a low-interest-rate environment like today.”

Incorporating Home Equity into a Retirement Income Strategy

Wade Pfau’s article Skip Navigation LinksIncorporating Home Equity into a Retirement Income Strategy was published in the Journal of Financial Planning in April 2016.The article’s Executive Summary:

Understanding Reverse Mortgages: An Interview with Shelley Giordano

SOA research has shown that non-financial assets are the biggest part of retirement assets for many middle American families. The largest part of non-financial assets by far are home values. Housing is the largest item of spending for older Americans, and housing costs vary greatly by geographic area and type of housing. Reverse mortgages offer a way to use some of the value of the home while still living in it. The SOA post-retirement risk research has indicated that few retirees are taking into account home values in their retirement planning.

The 2015 focus groups indicated low interest in reverse mortgages. People thinking about planning have been asking the question: how do we take housing values into account in retirement planning? What are the options? How do we evaluate them? This interview with Shelley Giordano provides information about reverse mortgages and how they are being used today.

Can you tell us a little bit about yourself and the Funding Longevity Task Force? Yes, thank you, I always welcome the chance to brag a little about the task force. After 15 years of experience in various aspects of reverse mortgage lending, and thanks to Torrey Larsen, CEO of Synergy1 Lending, I had the chance to invite a group of distinguished academicians to meet together to see what could done about improving understanding of reverse mortgages.

So in 2012, they took the leap, flew to San Diego, and just sat around a table to discuss their emerging interest in the role of housing wealth in retirement. It was becoming clear that in a DC world, where many people are poised to be underfunded in retirement, cash flow was going to be a problem. While just about every retiree has a home, there was a dearth of serious research on how the home could be monetized. This group of respected thinkers catalyzed an accelerating interest in research that measures how the home asset can positively impact a retirement plan. The members and I volunteer our time.

Our core group includes Marguerita Cheng, CFP®, Thomas C. B. Davison MA, PhD, CFP, Wade D. Pfau, PhD, CFA, Barry H. Sacks, PhD, JD, John Salter, PhD, CFP®, AIFA®, and Sandra Timmermann, Ed.D. Recently, the task force aligned with the American College of Financial Services. Associate Professor of Retirement Income and Co-Director of the New York Life Center for Retirement Income Jamie Hopkins, JD, MBA, and I were privileged to hold our first joint meeting at MIT with Dr. Deborah Lucas, Sloan Distinguished Professor at the Golub Center for Finance and Policy.

Our stated mission is to develop and advance, for retirees and their financial advisors, a “rational and objective understanding of the role that housing wealth can play in prudent planning for retirement income.” Before 2012, the comments in the financial press, and even the pronouncements of the Financial Industry Regulatory Authority (FINRA), about the use of housing wealth as part of retirement income were not based on any serious quantitative analysis. Instead, these comments were rather “offhand,” and consistently propagated a conventional wisdom that the use of housing wealth as part of retirement income planning should only be a “last resort.” In 2012, two significant research papers were published and a well-respected blog was written, all demonstrating quantitatively that, for a sizable number of retirees, the conventional wisdom was incorrect. Indeed, for many of those retirees, their financial well-being would potentially be adversely affected by treating housing wealth as a last resort. An objective and rational approach, i.e., the quantitative analysis, used in the research revealed that housing wealth should be considered early in their retirement years and not as a last resort. The potential to help improve retirements affects a significant number of people.

We estimate that those most likely to benefit from this approach, known in the financial planning community as the “mass affluent,” total between 10 million and 15 million households, of the approximately 75 million “Baby Boomers.” How important is home equity as a retirement resource? Why is it often invisible in the retirement planning process? Well, first of all, as Dr. Robert C. Merton, Nobel Laureate in Economics and Distinguished Professor at MIT, is fond of saying, the house is an EXISTING asset. Nothing new needs to be created, people have spent their lives building wealth by paying down their mortgages but now have a financial asset that is only realized at their death. Retirees have built a retirement pie of Social Security, qualified plans, savings, perhaps long term insurance, but when it comes time to retire, 65 percent of their wealth, which is bound up in their homes, is just flat out ignored. For some, it is like trying to retire on 35 percent of their wealth.

That may be okay for wealthy people but leaves most retirees dangerously short. We have to admit that the reluctance to use home equity has some cultural basis, but is probably more influenced by the bad reputation reverse mortgage lending suffers. Although much has been done to improve consumer safeguards, most recently with the Reverse Mortgage Stabilization Act of 2013, there is 56 | FEBRUARY 2017 PENSION SECTION NEWS Understanding Reverse Mortgages:

An Interview with Shelley Giordano widespread misinformation that hampers greater uptake. Sadly, financial advisors are often times even less aware of the features of reverse mortgages than their clients who see TV commercials. Financial advisors do not get paid on initiating a reverse mortgage, their compliance officers often forbid a conversation about home equity at all, and financial planning software does not yet include reverse mortgage payments, much less illustrate sophisticated strategies. A homeowner cannot expect an enthusiastic, or even particularly informed, reception from most advisers when seeking advice on how to release equity from the home. What are the key features of common reverse mortgages? What are the common differences in products?

Around 95 percent of all reverse mortgages in the United States are Home Equity Conversion Mortgages, or HECMs, and are insured by FHA. There is a small market for jumbo mortgages for very expensive homes. But what all reverse mortgages share is a nonrecourse feature. This means that regardless of what the loan balances become, the house stands as the sole collateral. Even if the house is underwater, no deficiency judgment may ever be taken against the borrower or his heirs.

This is the crucial safeguard for retirees but shockingly, even some financial advisers continue to believe that the “bank gets the house.” This is simply not true, and has not been true since President Reagan and the 100th Congress provided for modern reverse mortgage lending with the 1987 Housing and Community Development Act. Clients can choose between fixed or variable rates, trade higher interest rate margins for lender credits on closing costs (resulting in a somewhat lower initial credit capacity), or choose in some cases to limit their first year distribution in order to reduce the FHA mortgage insurance premium from 2.5 percent to .5 percent.

Regardless of what structure they choose, these safeguards are inviolate:

1. The borrower never relinquishes title. The bank does not “get the house.” Just like any mortgaged home, the house will pass to the heirs. The heirs can pay off the mortgage or sell the house and keep the remaining equity.

2. The borrower never owes more than the house is worth. Every borrower is assessed FHA mortgage insurance premiums (MIP) that protect the borrower, as well as the lender, if the house value is underwater at loan’s end. In fact, no deficiency judgment may be taken against the borrower or his or her heirs.

3. The borrower never has to move even if he or she no longer has access to more credit. Even if the HECM loan balance exceeds the home value and/or there is no remaining new credit available, the loan is in effect as long as one member of the couple remains in the home as a principal residence and homeowner obligations such as tax and insurance are met.

4. The borrower never has to make a payment on the principal or the interest until the last one remaining dies, moves or sells. Voluntary payments are accepted but never required. Some reverse mortgage strategies include paying down the loan balance when the portfolio regains value. It may be advisable to make voluntary payments on the interest early in retirement, if convenient, in order to restrain the buildup on the load balance from tacked-on interest. Compounding interest accumulation may not have as much impact later in retirement when life expectancy is shorter and home values are likely to be higher, but managing interest in early retirement years may be a prudent strategy.

FHA does not impose a prepayment penalty. Note that all homeowner obligations must be met, such as tax, insurance and maintenance, during the life of the loan, as will any other mortgage.

Source: The 4 Nevers. (2000). Giordano The initial credit capacity is based on the younger borrower’s age, the current interest rate environment, and the housing value. A rough guide is 50 percent (for the minimum age of 62) and reaches as high as 75 percent of home value at today’s rates, but only to the current FHA lending limit of $636, 150. Higher home values are accepted but for purposes of calculating credit the lending limit represents the highest initial credit calculation possible.

Current mortgages are allowed at time of application as long as the reverse mortgage (plus other funds if needed) extinguishes the lien/s at closing. Borrowers must attend third party independent counseling before a loan may be originated. Normally, interest accumulates and for the HECM is based on the one year or one month Libor. Upfront insurance (MIP) is either .5 percent for 60 percent or less initial utilization, or 2.5 Generally, a reverse mortgage is appropriate for those who are fairly certain they will stay in the home for as long as possible.

FEBRUARY 2017 PENSION SECTION NEWS | 57 housing without the need for monthly payments or dipping into savings in order to avoid a monthly mortgage payments.

Recently we discovered that the HECM product could be used in two different scenarios to restore equivalent housing to both sides in a gray divorce! This is an option divorce lawyers need to learn. The most conservative and popular use of a reverse mortgage is to set it up as a standby line of credit to meet future unexpected spending shocks. Interest does not accumulate on the unused credit, just like a traditional HELOC. However, unlike a HELOC, the line of credit grows every month at the exact same rate the borrowed funds are compounding. For example, if the monies borrowed are compounding at the annual rate of 4 percent in any given month, the remaining line of credit will compound at the smae 4 percent rate. This increase happens regardless of the value of the underlying asset, the home. Over many years, it is possible the LOC can exceed the home value, which provides valuable diversification for an asset that has idiosyncratic risk. In addition, a HECM line of credit cannot be frozen, cancelled or reduced. The client is free to make any payments he wishes, or no payments at all. percent if greater amounts are drawn at closing. The ongoing MIP accrues at the annual rate of 1.25 percent and is assessed on current loan balance monthly. The loan may be prepaid at any time without a prepayment penalty.

How can reverse mortgages be used? What are the principal strategies? Are reverse mortgages used much to generate more regular monthly income?

Reverse mortgages can be set up as an annuity on the house, known as a tenure payment option. This provides a monthly paycheck that will continue until the last borrower dies, moves or sells. The advantage to this payment, besides meeting cash flow needs, is that since funds from a reverse mortgage are not taxable, the tax equivalent withdrawal from a qualified account is avoided. In other words, not having to draw from an account that needs to accommodate taxes can significantly reduce early depletion of precious portfolio assets.

The HECM can be used to convert a traditional mortgage with monthly principal and interest payments into a mortgage without mandatory debt service.

In addition, very few people are aware that a HECM can be used to actually purchase a new home. This allows retirees to move to a more appropriate Traditional HELOC vs. HECM Line of Credit Comparison Traditional HELOC HECM Line of Credit Line of credit (LOC) cannot be frozen, reduced or canceled if the ongoing terms of the loan are met.

✔ Line of credit grows each month, regardless of home’s value.

✔ Allows homeowner to access the equity in their home for funds they can use for purpose while owning their home.

✔ ✔ No monthly payments required.*

✔ Minimal credit requirements. ✔ Minimal income requirements.

✔ Age-based loan: Homeowners 62 and older.

✔ Government-insured loan.


Previously a HECM skeptic, Quinn began recommending reverse-mortgage

Originators and other players in the reverse mortgage industry say that they’ve seen a notable shift in the way Home Equity Conversion Mortgages are covered in the general media, and public-relations monitoring data backs up those observations.

The National Reverse Mortgage Lenders Association uses a third-party public relations firm to track mentions of HECMs in the news; during the period from August 2016 to the present, 36.9% of all reporting on reverse mortgages was positive, with neutral mentions accounting for a further 56.1% — and negative stories representing just 6.4% of the total.

These hard numbers reflect a trend that many in the industry have observed in recent years, particularly as respected news outlets such as the Wall Street Journal and Forbes have reported on independent scholarship from researchers such as Wade Pfau, Harold Evensky, Gerald Wagner, and Robert Merton.

Brett Kirkpatrick, a partner at Harbor Mortgage Solutions, Inc. in Braintree, Mass., said his clients frequently bring in clippings of positive reverse mortgage articles from outlets such as Forbes and the New York Times. This of course was not always the case: Kirkpatrick said general opinion suffered from an “echo chamber” of rumors and negative reports feeding off of each other for years,

The tide began to change within the last four years, with Kirkpatrick pointing to an August 2013 column by popular financial-advice columnist Jane Bryant Quinn as a key turning point. Previously a HECM skeptic, Quinn began recommending reverse-mortgage lines of credit for certain borrowers in their early 60s as a retirement strategy. Kirkpatrick also applauded the National Reverse Mortgage Lenders Association’s efforts to meet with members of the popular media and educate them about the finer points of HECM.

“Those articles are definitely reaching our clients and our potential clients,” Kirkpatrick said.

But despite the positive numbers, there’s still opposition in certain markets. Danny Phillips of Southchase Mortgage in Foley, Ala. says he frequently faces resistance from prospective clients who tell him that “they” say reverse mortgages are scams. He always has the same response: “Well, what’s bad about them?”

“They can never tell me,” Phillips said.

Phillips went so far as to reach out to the local NBC affiliate after one of its news programs ran a sensationalist story about a woman who faced a reverse-mortgage foreclosure. Phillips pointed out that the report was light on specific details, and used the terms “foreclosure” and “reverse mortgages” as a type of attention-getting scare tactic.

“There shouldn’t be any foreclosures,” Phillips said. “(But) people with forward mortgages get foreclosed on. That doesn’t stop anyone from doing a forward mortgage and buying a house.”

Phillips said that Southchase first concentrated solely on regular “forward mortgages,” but that he became interested in HECMs after his parents got older and needed help with money for their retirement. Even though Phillips’ mother ended up having to go through a foreclosure after she moved into a nursing facility and the property was slow to sell, Phillips said he still sees the benefit of reverse mortgages, and began offering them to his own clients.

He said any changes in the popular opinion of HECMs that he’s seen in his neck of the woods were due to his work making connections with local banks.

“It’s through my efforts,” he said. “I would love some help.”



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“I’m excited…”

Warren Strycker, longtime advocate of the HECM Reverse Mortgage, has boarded with longtime Mutual of Omaha to support seniors along Western Arizona with a base office in the Yuma Foothills’

What a HECM Can Help You Do
  • Purchase a new home to fit your lifestyle needs
  • Protect your retirement portfolio
  • Reduce monthly expenses by paying off existing mortgage
  • Reduce monthly expenses by paying debt
  • Enhance your cash flow
  • Incorporate housing wealth into your retirement plan
  • Create an emergency fund
  • Increase cash to help ensure monthly bills are paid
  • Fund for home repairs or upgrades
  • Reduce the burden of out-of-pocket healthcare costs
  • Fund the expense for caregivers, live-in nurses, or other in-home care
  • Have the cash for a large expense, such as a vacation or vehicle
Call Warren…928 345-1200 for information

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Hello Surprise, Arizona!

SPREAD THE WORD IN SURPRISE. You’ve been chosen to participate in a HECM webinar because of your strong interest in Reverse Mortgage information. Check in and leave your email address to be contacted. Warren Strycker (yes, I’m Arizonian). No obligation other than your interest in learning about HECM mortgages. Email: with your questions or let’s chat on WhatsApp.  Call me toll free 866-334-1200 and let’s talk about it. OK? Thank you.


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Hello Phoenix, Arizona!

SPREAD THE WORD IN PHOENIX. You’ve been chosen to participate in a HECM webinar because of your strong interest in Reverse Mortgage information. Check in and leave your email address to be contacted. Warren Strycker (yes, I’m Arizonian). No obligation other than your interest in learning about HECM mortgages. Email: with your questions or let’s chat on WhatsApp.  Call me toll free 866-334-1200 and let’s talk about it. OK? Thank you.

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Hello Boardman, Oregon!

SPREAD THE WORD IN BOARDMAN. You’ve been chosen to participate in a HECM webinar because of your strong interest in Reverse Mortgage information. Check in and leave your email address to be contacted. Warren Strycker (yes, I’m Oregonian). No obligation other than your interest in learning about HECM mortgages. Email: with your questions or let’s chat on WhatsApp. Thank you.